Investment Grade

The clear opportunity within IG credit from our perspective, without having to take excessive risk, is to buy legacy Bank and Insurance IG debt.

September new issuance has opened with a bang as we expected. Volumes are high and the issuer types are diverse, with a slant towards more frequent borrowers who tend to have their ducks permanently lined up in order to jump on favourable conditions. We expect this trend to continue throughout September as bankers push borrowers to take advantage of what could be one of the best opportunities they might see this cycle.

Fixed income investors globally face a daunting environment in 2019, with a deteriorating credit cycle, heightened political volatility and increased uncertainty around global monetary tightening.

For fixed income investors, it has been impossible to ignore the proliferation of press coverage about the growth of the triple-B rated corporate bond market, and a coming wave of downgrades for companies rated BBB to high yield, with these ‘fallen angels’ exposing investors to mark-to-market losses at best, and defaults at worst.

In January 2015, after years of market share erosion and leverage increases, Tesco bonds were downgraded to junk status by Moody’s and S&P, forcing all of Tesco’s debt stack out of IG corporate bond indices in the process.

With September now behind us, colder mornings and darker nights approaching it seems an opportune time to take stock of how the primary market reopened this year after its traditional summer lull.

Fixed income investors globally face a huge challenge defending returns against rising rates and resurgent volatility. The Federal Reserve’s famous ‘dot plots’ are projecting two more quarter-point rate hikes in 2018 and a further four in 2019, which if carried out would take the upper bound of the Fed Funds rate to 3.5%. Other central banks may be lagging on the path to policy normalisation, but the direction is set and in all likelihood the low yields of this cycle are now behind us.

Typically in August, credit liquidity becomes a bit like my lawn this summer: patchy. Over the past few weeks there have been a few stories of large fund groups seeing significant outflows from the asset class, and even of liquidations, which begs the question: what are they selling?

Several times this year we have discussed the benefits of “roll down” in an environment that for fixed income investing is particularly unfriendly. We believe roll down gains will be one of the best ways to protect portfolios in 2018 from the rising rate curves that we have been experiencing so far.

After a volatile fortnight in the market, we appear to be closing this week in a relatively calm manner.

Yesterday, 10yr Gilts closed at 1.510%.  Whilst that individual yield level does not sound particularly significant, in a historical context it is possibly one of the most important month end closing levels I have witnessed in more than 25 years in the markets.

1994 was my first full year in the markets, and what a baptism of fire it was.